Answered: On April 1, 2020 JKL Company discounted…

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 11E

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On April 1, 2020 JKL Company discounted with recourse a 9-month, 10% note dated January 1, 2020 with face amount of P6,000,000. The bank discount rate is 12%. The discounting transaction is accounted for as a conditional sale with recognition of contingent liability. On October 1, 2020, the maker dishonored the note receivable. The entity paid the bank the maturity value of the note plus protest fee of P50,000. On December 31, 2020, the entity collected the dishonored note receivable in full plus 12% annual interest on the total amount due. If the discounting is secured borrowing, how much is the interest expense included in the transaction to record transaction cost?

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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